Indonesian Manpower Law: How To Hire in Indonesia

Indonesian Manpower Law

The Indonesian manpower law is protective of the interests of the workers. Therefore it is important to familiarize yourself with employer obligations according to the law.

In this article, we will explain your legal obligations as an employer in Indonesia. A special section is dedicated to discuss employee termination, which can be complex and even costly for the less prepared employer.

In the last section, you will find alternatives to hiring permanent employees. These alternatives are especially attractive if your company’s scope of work is prone to change or requires more flexibility than what is possible with permanent employees.

What are your legal obligations as an employer according to the Indonesian Manpower Law?

The most obvious obligation is to provide all your full-time employees with health insurance and basic social security benefits.

The Indonesian government has created a public health insurance scheme (BPJS Kesehatan) and social security program (BPJS Ketenagakerjaan) for your employees. You have to make sure all your full-time staff are registered for both programs.

The costs of these programs (which will depend on the employee’s gross monthly salary) must be partially covered and paid each month by the employer. Below are the details of both programs’ payment scheme:

Indonesian Social security system

Types of social security Your due (% of your employee’s gross monthly salary) Your employee’s due
Retirement savings (JHT) 3.7 2
Work-related injury insurance (JKK) 0.24 0
Pension plan (JP) 2 1
Accidental death insurance (JKM) 0.3 0

Indonesian Health insurance system

Types of social security Your due (% of your employee’s gross monthly salary) Your employee’s due
Health insurance 3 2

Aside from social security, there are also some basic working conditions that you must provide for your employees:

Subjects The conditions as regulated by the manpower law
Work Agreement Must be of indefinite duration, unless the jobs:

Are temporary/seasonal by nature

Concern a project that will end in less than 3 years (based on reasonable estimation)

Concern a new product/activity that is still in its experimental stage
If the agreement is only valid for a certain time, the validity term must be no longer than 2 years. This type of agreement can only be extended once, for a period of no longer than 1 year.

Probation period You cannot put on probation employees whose work agreements are not of indefinite duration

For staff with indefinite duration agreements, their probation period must be no more than 3 months

 

Working hours 40 hours/week:

Either 7 hours/day for 6 days a week, or

8 hours/day for 5 days a week.

Overtime Maximum overtime work is 3 hours a day or 14 hours a week

Overtime must be performed with the employee’s consent

Employees have the right to receive overtime pay

Employees working during public holidays must receive overtime pay too

Minimum wage The standard will depend on the provincial/municipal regulations of each province/city/district

Employers must comply with the relevant minimum wage standard — you may be allowed to make postponement if you are currently unable to comply with the regulation

You are not obliged to pay for the days your employee fails to perform work — unless it is due to illness or family matters (including the death of an immediate family, a son’s/daughter’s wedding, a son’s circumcision).

Severe illness If your permanent employee is absent from work due to a severe illness, he/she is still entitled to his/her monthly salary:

For the first four months of absence, he shall be entitled to receive 100% of his wages,

For the second four months of absence, he shall be entitled to receive 75% of his wages

For the third four months of absence, he shall be entitled to receive 50% of his wages; and

For subsequent months, he shall be entitled to receive 25 % of his wages until a termination occurs.

Comspany regulation You must create a company regulation if you hire more than 10 permanent workers. The regulation must specify at least:

The rights and obligations of the employer

The rights and obligations of the worker

Ideal working conditions in the company

Company ethics and rules of conduct

Validity term of the regulation

Your company regulation cannot be set against the Indonesian manpower law.

If your workers’ union wishes to propose a change to the company regulation, you – as their employer – must agree to negotiate

Employee termination

The manpower law states that both employees and employers must attempt to avoid employee termination. However, if you do have to terminate an employee then it is important that both parties understand their rights and responsibilities.

Here are what the law requires you to do:

  • Negotiate with your employee (and his workers’ union, if he is a member of one) before proceeding with the termination.
  • Give three warning letters to your employee (in the case of termination due to violations of work agreements/company regulations)
  • Give severance pay, reward for service in the form of money, and/or compensation money. (Even when the termination happens because the employee has committed a grave wrongdoing such as stealing, you still have to give her compensation money.)

Details of the pay can be found below:

Types of payment
Severance pay 1-month wage for an employment of less than a year

2-month wages for employment of 1-2 years

3-month wages for employment of 2-3 years

4-month wages for employment of 3-4 years

5-month wages for employment of 4-5 years

6-month wages for employment of 5-6 years

7-month wages for employment of 6-7 years

8-month wages for employment of 7-8 years

9-month wages for employment of 8 years or more

Reward for service 2-month wages for employment of 3-6 years

3-month wages for employment of 6-9 years

4-month wages for employment of 9-12 years

5-month wages for employment of 12-15 years

6-month wages for employment of 15-18 years

7-month wages for employment of 18-21 years

8-month wages for employment of 21-24 years

10-month wages for employment of 24 years or more.

Compensation pay A sum of money worth the days of annual leaves that the employee has not taken

A ransom to return the employee to his family

Compensation for housing allowance, medical and health care allowance, for 15% of the severance pay

Other compensations stipulated under the work agreement

Detachment money Depends on the work agreement/company regulation

What you owe to the dismissed employee can be found in the table below:

Cause of termination Employee’s rights
General causes, e.g. declining work performance, failure to meet targets, etc. Severance pay and/or reward for service

Compensation money

Rationalization in the company 2 x severance pay

Reward for service

Compensation money

Employee resigns at her own will Compensation money, or

Detachment money (for non-managerial employees)

Grave misconducts Compensation money, or

Detachment money (for non-managerial employees)

Change in the status of company ownership When the employee is not willing to continue his employment:

Severance pay

Reward for service

Compensation money
When the new employer is not willing to continue the employment:

2 x severance pay

Reward for service

Compensation money

Severe chronic illness for more than 12 months /

Disability due to a work-related accident

2 x severance pay

2 x reward for service

Compensation money

Five days of missing Compensation money

Detachment money

Imprisonment Nothing, but you have to support his dependents during the time he is imprisoned.
1 dependent: 25% of the employee’s monthly salary2 dependents: 35%3 dependents: 45%4 dependents or more: 50%
Employers have to support the imprisoned employee’s dependents for as long as 6 months.
Retirement age 2 x severance pay

Reward for service

Company goes bankrupt and closes down Severance pay

Reward for service

Compensation money

Death of the employee 2 x severance pay

Reward for service

Compensation money
(paid to the employee’s heir)

Alternatives to Hiring Permanent Employees in Indonesia

As you could see, contrary to what many foreign investors assume, Indonesian Manpower Law foremost protects the interests of employees, and as an employer, you have more responsibilities than just providing a monthly salary.

But you do not always have to hire permanent staff. Non-permanent employees, such as freelancers and contract workers, can reduce employment costs and are more flexible.

 

Freelancers Salary depends on the volume of work / work attendance

Must work for less than 21 days in a month

Employers do not have to pay for social security/health insurance

Contract workers Fixed amount of monthly salary

Still eligible for social security/health insurance just like permanent workers

No rights to severance pay — contract workers terminated before the end of their terms will only be entitled to compensation pay

Only available for certain positions (see Table 2 – ‘Work Agreement’)

With many options available to you, it is important to make smart choices as an employer when it comes to both who to hire and how to hire them.

Indosight provides you with all the legal framework you need when it comes to hiring, starting from employment contracts until advising you on how to correctly terminate an employee. Contact us through the form below and let’s discuss what we can do or you..

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